Fourth Dimension Software v. Der Deutsches Reiseburo GMBh & Co., OHG

Background

Fourth Dimension Software (FDS) alleged that Der Touristik Deutschland GmbH (DTDE) breached a software contract in two ways: by exceeding license caps for FDS’s SafePath, EasyPath, and EasyClient tools, and by making the Phoenix system available to Aovo, which necessarily gave Aovo access to the tools used to operate Phoenix. DTDE owned Phoenix but licensed the tools from FDS.

DTDE moved for summary judgment, which is a ruling entered without a trial when no genuine dispute of important fact exists and the moving party is entitled to judgment under the law. DTDE argued that FDS had known about both alleged breaches for more than a decade, so California’s four-year contract statute of limitations barred the claims. DTDE also argued that FDS waived its claims by accepting payments while allegedly knowing about the breaches.

FDS moved for sanctions under Federal Rule of Civil Procedure 37(e), arguing that DTDE had a duty to preserve electronic records showing use of Phoenix and the tools and deleted those records in 2018. FDS sought relief for the loss of evidence relevant to both the alleged license overuse and Aovo’s use of Phoenix.

Summary-Judgment Ruling

The court denied DTDE’s motion for summary judgment. Regarding Aovo’s use of Phoenix, the court held that the discovery rule could apply because FDS presented evidence that the alleged third-party use was difficult to detect and that DTDE was in a better position to know about it. The court found a genuine dispute about when FDS knew or reasonably should have known about the claim. Although DTDE pointed to earlier emails and German regulatory filings, the court concluded that reasonable jurors could disagree about whether those materials put FDS on notice of Aovo’s use of Phoenix.

Regarding alleged license overuse, the court identified factual disputes about whether DTDE breached the license caps at all, when any breach occurred, and when FDS knew or reasonably should have known about it. The court also found disputes about whether FDS reasonably relied on DTDE’s assurances that it was not overusing the licenses. Those credibility and fact questions prevented summary judgment.

The court likewise denied summary judgment on DTDE’s waiver defense. Under the court’s description of California law, waiver generally requires knowledge of the breach together with a clear, intentional decision to continue performing or accept performance without notifying the defendant. Because the evidence created disputes about when FDS knew or should have known about the alleged breaches, the waiver defense could not be resolved on summary judgment.

Sanctions Ruling

The court granted FDS’s motion for sanctions. It found that DTDE’s duty to preserve the usage records arose no later than August 2018. By then, FDS had identified both alleged breaches, the parties had engaged in months of discussions about resolving the dispute, and FDS had sent a letter stating that it intended to file a complaint if settlement efforts failed.

The court found that DTDE violated its preservation duty by deleting the records when it removed the tools from its machines at the end of 2018. The court also found that the deletion prejudiced FDS because the records could have shown the extent of DTDE’s license use, the extent of Aovo’s access to Phoenix, and the damages associated with the alleged overuse.

The court further found that DTDE acted with an intent to deprive FDS of the records’ use in litigation. The court relied on the timing and circumstances: DTDE knew or should have known that the records were highly relevant and deleted them shortly after receiving notice that FDS was prepared to sue. The court rejected DTDE’s argument that its letters merely disclosed an intention to phase out Phoenix and the tools.

Rather than dismissing the case or entering default judgment, the court ordered an adverse-inference jury instruction. The instruction permits the jury to presume that the deleted records were unfavorable to DTDE, including that they showed DTDE breached the contract by exceeding the tools’ license caps. The court concluded that this instruction was more appropriate than the other available sanctions because FDS had not shown that the loss of the records prevented it from proving its case, even though the loss caused prejudice.

Disposition

The court denied DTDE’s motion for summary judgment and granted FDS’s motion for sanctions with the specified jury instruction. The opinion states that the case had survived summary judgment and that trial was next.